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What are Penny Stocks In 2023?
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What are Penny Stocks?
Penny stocks are cheap stocks of small companies with a trading price of below $5. Most of such stocks trade over-the-counter through the electronic OTC Bulletin Board (OTCBB) or OTC Markets Group, hence also known as OTC stocks. Some even trade on NASDAQ or New York Stock Exchange (NYSE) and are required to maintain compliance with the US Securities and Exchange Commission (SEC).
May 26, 2023
Penny Stock Investments- How Can You Invest in Them?
Penny stock trading can be done through a brokerage account to buy from OTCBB or OTC Markets Group. First, however, you need to follow the basic precautionary steps:- Invest the amount you are willing to lose- Penny stocks are highly volatile stocks, and there is a significant risk of losing the invested amount. Thus, the money invested should be limited to the amount you are comfortable losing to avoid any serious financial trouble.
- Set realistic expectations- It is important to understand that penny stock moves are often short-term, driven by emotions rather than the company’s fundamentals. Thus, such stocks are subject to high volatility, and a profitable investment can turn into losses due to unrealistic expectations
- Beware of scams- Fraudsters use such stocks to pump and dump, making gullible investors fall prey to promotional emails and posts that promise exorbitant returns.
- Conduct proper due diligence- Since such cheap stocks are often associated with small, lesser-known companies, it’s important to research the companies to understand their financial health, business model, management team, competitive landscape, and any recent news or developments that may impact their stock price.
Advantages and Disadvantages of Penny Stocks
Pros :-
- Provides funding for small businesses- They are a way for small businesses to generate funding from the public and expand their market share.
- Greater growth potential- Since such stocks are cheap, they have a high upside growth potential. For example, once a penny stock, Amazon has now become a high-valued blue-chip stock.
Cons :-
- Lack of publicly available information- The corporate performance and information regarding such companies are difficult to find as most are not traded on large stock exchanges such as NYSE and NASDAQ. Stocks trading on OTCBB are required to file financial statements with US SEC, whereas pink sheet stocks are not required to do so.
- No minimum requirements for an OTC listing- Such stocks do not require minimum required standards for trading on OTC markets, because of which investing in such companies is riskier.
- Liquidity and Fraudulent Activities- Such speculative stocks often are illiquid, and a seller may not find a potential buyer at the desired sell price. Moreover, lower liquidity enables scammers to use such stocks for pump-and-dump schemes and trap gullible investors.
Bottom Line
Penny stocks are low-cost stocks traded on the OTC markets and subject to lesser compliance and reporting standards. As a result, they are usually highly volatile and quite riskier due to greater speculation. However, they also provide greater upside potential due to their low price if their offered product and service carry a competitive edge to make its fundamentals grow in the long run.
FAQs
Yes, they are risky due to limited liquidity and higher volatility. Hence, proper caution needs to be maintained while investing in them.
They trade on OTC markets such as OTCBB and can be purchased by opening a brokerage account.
Though risky, money can be made as they offer huge upside potential if the companies’ business fundamentals grow.
You must conduct proper due diligence to understand the company’s business, i.e., the products and services offered by them, the industry prospects, and its financial health to sustain over the long term.
Risk can be mitigated by avoiding overexposure and through proper portfolio diversification.